Friday, 10 August 2018

The IMF still exudes BS.

Bill Mitchell (Australian economics prof and leading MMTer) has claimed more than once that the IMF is a waste of space and should be disbanded. So it was good to see this recent admission by the IMF that they have blundered.

The main problem with the IMF is their non-grasp of macroeconomics, as is shown in this recent blog article of theirs written by Vitor Gaspar and Laura Jaramillo. They claim that high government debt is a potential problem: as they put it, “Countries with elevated government debt are vulnerable to changing financing conditions, which could hinder their ability to borrow, and put the economy in jeopardy.”

Incidentally, I shouldn’t strictly speaking assume that views expressed by two authors of an IMF blog article have the blessing of the IMF as a whole. However, the views expressed in this article are actually very much in line with IMF thinking as I understand it and judging by other IMF articles I’ve read. Plus the IMF like any organisation is certainly not likely to publish articles which flatly contradict their basic thinking. 

Now what exactly are “changing financial conditions”? I’m almost certain what they mean is a rise in interest rates: certainly if you are a debtor and interest rates rise, they you’re liable to have problems.

So why don’t they call a spade a spade? I.e. if they mean a rise in interest rates, why don’t they say so? Well if you’re not too sure what you’re talking about, then it’s best to keep what you’re saying on the vague side. Then if anyone accuses you of saying one thing, you can claim you were saying something else!

At any rate, are rising interest rates a problem for a monetarily sovereign country with a relatively high debt? I’ve been through this several times before on this blog, but when trying to teach the educationally challenged (or whatever the correct PC phrase is), what else can you do apart from repeat yourself till you’re blue in the face?

A rise in interest rates is not a problem for an indebted government  in that the interest it has to pay on its existing debt does not rise immediately: the rate of interest was fixed when the debt was first issued. And that’s an important point in the case of the UK where the average date to maturity of government debt is on the long side: only about 10% of UK government debt matures and needs replacing each year.

As to the debt that DOES NEED replacing or “rolling over”, a monetarily sovereign government is free to tell potential creditors who want more interest than previously to shove off. That is, such a government can simply print money, pay off the creditors and tell them to go away.

Of course that is liable to be inflationary (not that printing billions and buying back government debt as part of the QE operation has actually proved all that inflationary). But to the extent that inflation is a problem, that is easily countered by anti-inflationary measures, like raising taxes and “unprinting” the money collected.

But apparently the IMF doesn’t understand that.

No doubt I’ll be spelling out the same message in six months time. You have been warned.

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